The Failure of the Elio

In 2009, Paul Elio, an auto industry veteran, decided to create his own car company that was meant to turn the industry on its head by delivering an affordable car with fantastic fuel economy designed to be the 2nd car for a family that could easily be used for a daily commute to work. Starting at a price around $6000 USD, the car is a two passenger tandem vehicle with half of the frontal space of a normal vehicle, reducing its drag significantly and relying on a motorcycle suspension and three-wheel design to deliver 84-mpg with a traditional internal combustion engine.

Financing was raised through customer pre-orders and a stock offering, but approaching 10 years, there have been no models rolling off of any assembly line.

How can we be in this position when other net new car companies have rolled out numerous products, like Tesla, in the same timeframe? I think this comes down to Elio being an industry veteran and doing things the same way that they have always been done. This is the essential concept behind “First Principles” thinking that Elon Musk espouses.

First Principles

Elon Musk is many things, but he is at the helm of numerous innovative companies in diverse industries, including: Tesla, SpaceX, and the Boring Company. Each of these industries have been considered mature and have had very little disruption. The key to the disruption has been the thinking behind First Principles. Musk has given numerous talks referencing this approach and the most common topic is batteries. For a long time, it was accepted as fundamental truth that producing batteries was very expensive; in order to produce 1kWh of power would require a cost of $600 USD. Using First Principles, Musk breaks things down:

  1. What makes up a battery? It is made of various metals and polymers.
  2. What are the spot prices for these materials on the open market? It turns out, it is about $80 USD for the materials to produce a 1kWh battery.
  3. How can we change the manufacturing, logistics, and sourcing processes to reduce the gap between the $80 USD cost to acquire the materials and the present cost of $600 USD to have a finished product? Musk says, how can we come up with a novel way to make these materials into the shape of a battery.

This is not the first use of First Principles, however. In the biography on Musk, the same process was used to determine if it was possible to get into the space industry where he did a quick back of the envelope (in this case, on a napkin) estimate of the costs after spending some time reviewing old Russian documents describing rocket construction.

Elio is Building the Beginning as the End

Instead of taking a small scale approach and scaling up, Elio is trying to build out the entire infrastructure so that a full scale production can happen from day one. This is a huge mistake. He has been burning through funds for nearly a decade without any discernible progress. This approach should be scrapped. An attainable goal should be established to create the first 100 vehicles at a premium of 50% above the proposed cost; if they have to be hand manufactured, so be it. While this process is occurring, begin developing and testing automation to reduce the time and error rates in the manufacturing process. Introduce the automation into the current process a little bit at a time with the goal being to automate 10-25% of the process by the end of the first run of 100 vehicles.

Next, create a goal of 1000 vehicles with a premium of 25% of the proposed cost beginning with existing automation. The goal still being to introduce more automation into the process with a goal of getting 50% of the desired automation level by the end of the 1000 vehicle run.

Then, push things out to a 5000 vehicle run with a 10% premium and a goal to reach 75% of the desired automation.

At this point, use these processes to roll into mass production. Continue to develop automation.

These steps would create more financial viability as revenue would be coming in and instead of burning through the cash for nearly a decade without any product on the market, at least something would be out there. This could create addition brand buzz and demand for more vehicles.

Next Steps

After successfully delivering this vehicle, Elio could take this vehicle and derive the next vehicle as an iteration. Perhaps an all electric model or something with some durability for cargo carrying (eliminating the tandem passenger seat and creating an exposed cargo bed with something akin to a hard plastic liner).

What Does Elio Have Right

I think that the rough price point for a vehicle of this design, marketed as an additional vehicle is a good choice. This vehicle is not going to suite a family as a primary vehicle, that is for sure. It is inexpensive enough that a middle class family could consider buying a this as a new vehicle to supplement what they already have and the fuel savings could pay for the vehicle within a few years. It does not take up too much space, so perhaps the standard two-car garage where many family keep only one vehicle could have room to include the Elio.

The product is something that has demand. Elio needs to fix the business and that probably means he should no longer be the CEO. He should lead product development unless he is willing to completely retool his own approach to running the company.

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